BANCO SANTANDER MÉXICO, S.A., INSTITUCIÓN DE BANCA MÚLTIPLE, GRUPO FINANCIERO SANTANDER MÉXICO
Fitch Ratings has affirmed
The Rating Outlook is Stable.
Fitch has also affirmed the Long- and Short-Term National Scale ratings of Santander Mexico,
Fitch revised the trend of its assessment for the operating environment (OE) scoring at 'bb+' for Mexican banks to Stable from Negative. Fitch believes banks will face downside risks once again in 2023 due to decelerating economic growth and high inflation; however, Fitch expects the banks' performance to remain resilient and most banks' core metrics have sufficient headroom to face these risks.
Key Rating Drivers
Ratings Driven by Shareholder Support: Santander Mexico's IDRs, SSR, senior debt and national ratings reflect the strong ability and propensity of support from
Strong Ability to Support: Santander Mexico's IDRs are notched down once from its ultimate parent, reflecting Fitch's assessment of Santander's ability to support, which considers its relatively high 'A-'/Outlook Stable IDRs, and the moderate size of whole Mexican operations relative to Santander (5.6% of its total assets and 8.2% of equity as of
Strategic Importance for Parent: In turn, support's propensity assessment weighs Santander Mexico's strong synergies with its parent, providing key products and services in a strategically important market where Santander has consolidated a relevant market position and a profitable business unit. Fitch considers country risks as a high importance factor within the support assessment, as Mexico's 'BBB+' country ceiling could constrain the bank's IDRs if Santander's ratings are upgraded.
Strong Business Profile: Santander Mexico's 'bbb-' VR is supported by its sound business profile, which is underpinned by its significant market position and diversified business model. As of
Asset Quality with Moderate Pressures: Fitch believes Santander Mexico's asset quality metrics could deteriorate in the short- to medium-term as the bank focuses on increasing its consumer loans share but effects will be marginal as the bank retained selected and high-value clients and cleaned up its loan portfolio after the coronavirus pandemic. As of 3Q22, Santander Mexico's NPL ratio was 2%, the best metric since 2018, which in conjunction with an adequate level of loan loss allowances that covered 133.6% of its impaired loans and lower net charge-offs that represented 2.3% of the average gross loans, both metrics comparing favorably than its 2018-2021 average of 130.4% and 3.2%, respectively, proved the improvements of the bank. In addition, controlled concentrations due to a diversified loan portfolio and a focus on lower-risk segments and secured lending (51.7% of loan portfolio) underpin the bank's asset quality.
Improvements in Profitability: Santander Mexico registered an operating profit to Risk Weighted Assets (RWA) ratio of 4.8% as of 3Q22, the highest metric of the last four years but that compares unfavorably with its closest local peers. The earnings and profitability profile have benefited from operating efficiencies but mainly from lower credit costs due to asset quality improvements and front-loaded reserves during the pandemic. As of 3Q22, loans impairment charges represented 22% of pre-impairment operating profit, the lowest metric since 2018. Fitch believes the bank's profitability will gradually reduce as the bank grew and incurred in credit costs, but expects that the metrics will remain above its pre-pandemic levels due to its strategies focused on improving its earnings and profitability.
Adequate Capital Buffers to Contain Risk: Santander Mexico's capital ratios declined from YE 2021 but current levels provide it good loss absorption capacity in Fitch's opinion. As of 3Q22, the CET1 (common equity Tier 1) to RWA ratio was 13.9%, 91 basis points below YE 2021 metric due to two dividend payments that represented 98.9% of 2021's net income, but still considerably above pre-pandemic level (YE 2019: 11.9%) driven by consistent earnings generation and moderated loan growth in the last two years. Fitch believes Santander Mexico's capital ratios will remain at adequate levels and consistent with its ratings given the bank's good earnings generation as well as TLAC (total loss absorbing capital) requirements should aid any pressures from credit growth and dividend payments. Fitch's capitalization assessment positively incorporates the bank's additional buffers as Tier 1 (AT1) notes and subordinated debt, as well as the shareholder support, as these instruments are held by Santander.
Stable Funding and Liquidity: Santander Mexico's funding profile registered a deterioration due to significant YTD credits growth (7.1%) and a contraction of customer deposits (2.2%) during the same period; however, is adequate and commensurate with the bank's ratings. As of 3Q22, gross loans to customer deposits ratio was 105.1%, which compares unfavorably with its closest local peers and reflects the bank's weaker funding mix structure which is less reliant on customer deposits. Liquidity profile is satisfactory as measured by regulatory metrics such as liquidity coverage and net stable funding ratio. As of 3Q22, these were 181.1% and 109.9% respectively.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
IDRs and SSR
Any change of Fitch's perception of the strategic importance of Santander Mexico to its parent may trigger a review of its IDR and SSR. The ratings are also sensitive to a downgrade of Mexico's sovereign ratings.
VR
A downgrade could arise from a significant asset quality or profitability deterioration, resulting in pressure on its CET1 ratio to levels consistently below 11% and operating profit to RWA ratio to consistently below 2%.
National Ratings
A downgrade of the National Ratings could be possible only if its support driven IDRs are downgraded significantly.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
IDRs and SSR
Santander Mexico's IDRs and SSR would mirror any changes in Santander's IDR. However, due to country ceiling constraints there is limited upside potential, as the entity is considered strategically important to Santander, and its ratings are already at the maximum support-driven uplift per Fitch's criteria.
VR
Upside potential is limited as the bank is rated at the level of the sovereign, due to the high and growing exposure to the public sector. A substantial increase in market position would be needed for an upgrade, which is not Fitch's base case.
National Ratings
National scale ratings are at the highest level on the national scale; therefore, they cannot be upgraded.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Senior Debt: The senior local and global debt is at the same level as Santander Mexico's '
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Global and local senior debt ratings would mirror any changes in the bank's IDRs or national scale ratings. The bank's hybrid securities ratings could change in the event of a downgrade on the bank's support-driven IDR.
SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS
The national ratings for Santander Consumo, SIF and CB Santander are driven by Santander's ability and propensity to support these subsidiaries if required. Fitch considers these subsidiaries are strategically important for Santander, as they are relevant for the execution of the group's objectives in
SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Any potential changes of Santander Consumo, SIF and CB Santander's national ratings will be driven by any changes in Santander's ratings or in Fitch's assessment of its propensity to support these subsidiaries.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Santander Consumo, SIF and CB Santander's ratings are at the highest level on the national scale; therefore, they cannot be upgraded.
VR ADJUSTMENTS
The Asset Quality Score of 'bbb-' has been assigned above the 'bb' category implied score due to the following adjustment reasons: Collateral and reserves (positive).
The Capitalization & Leverage Score of 'bbb-' has been assigned above the 'bb' category implied score due to the following adjustment reasons: Capital flexibility and ordinary support (positive).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Summary of Financial Adjustments
Prepaid expenses and other deferred assets were classified as intangibles and deducted from equity to reflect their low absorption capacity.
Sources of Information
The principal sources of information used in the analysis are described in the Applicable Criteria.
Financial figures are in accordance to the CNBV criteria. 1Q22, 2Q22 and 3Q22 figures include recent accounting changes in the process to converge to International Financial Reporting Standards (IFRS). Prior years did not include this change and the agency believes they are not directly comparable.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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